Chapter 12: Managing Costs and Budgets


Chapter 12: Managing Costs and Budgets
Yoder-Wise: Leading and Managing in Nursing, 6th Edition


1. The chief nursing office of a Magnet™ hospital has conducted a study of ways to improve healthcare services. Healthcare services that add value for clients:
a. Accomplish healthcare goals.
b. Minimize costs.
c. Decrease the number of services used.
d. Use high-technology treatments.
Models of reimbursement affect which services and approaches (e.g., decreasing the number of services used) might be financially viable and add value for clients. It is critical to determine and advertise the value of nursing care. Services that add value are of high quality, affect health outcomes positively, and minimize costs.

REF: Page 217 TOP: AONE competency: Business Skills

2. The difference between a nurse practitioner’s charge of $45 for an office visit and the insurance company’s payment of $34 is:
a. A contractual allowance.
b. A profit.
c. A flat rate.
d. Revenue.
Because the amount that is allowed for an office visit is less than the amount that the NP charges, this is known as a contractual allowance or discount. If the amount allowed were more than what the NP charges, then a profit would be realized. All of the answers represent sources of revenue.

REF: Page 215 TOP: AONE competency: Business Skills

3. The chief nursing office continues to seek ways to improve healthcare services to clients and to save the hospital money. However, with the federal guidelines of paying agencies based on capitation, the chief nursing office faces a challenge. Capitation provides incentives for healthcare providers to control costs by:
a. Providing fewer services to fewer clients.
b. Using fewer services per client.
c. Using high-technology treatments.
d. Requiring second opinions.
In a capitated environment, a single fee is paid for all services provided. To be financially viable under this reimbursement model, organizations would be interested in decreasing the volume of services used and increasing the volume of patients. High-technology treatments and second opinions may increase the number of services used.

REF: Page 218 TOP: AONE competency: Business Skills

4. In a nurse managers’ meeting, the chief nursing officer encourages the managers to brainstorm ways to reduce costs. Nurse managers have the greatest impact on reducing costs by managing:
a. Supplies.
b. Staffing.
c. Fixed costs.
d. Medication costs.
Because staffing constitutes the largest portion of any healthcare budget, managing the mix and numbers of staff required for patient care to meet identified outcomes will have the largest impact on budgets.

REF: Page 220 TOP: AONE competency: Business Skills

5. The chief nursing officer works with her nurse managers by helping them understand how to develop and implement a budget. A nurse manager can best describe a budget as a:
a. Day-to-day plan for operations.
b. Unit of service.
c. Statement of revenues and services.
d. Financial plan.
The budget is an overall financial plan that reflects organizational assumptions, objectives, and standards, and various types of budget planning, including operational and capital budgets, which, in turn, reflect revenues and costs.

REF: Page 222 TOP: AONE competency: Business Skills

6. A nurse manager approves two staff nurses to attend a national conference. When reviewing the budget, the nurse manager looks at which line item?
a. Cash budget
b. Capital budget
c. Operating budget
d. Supply and expense budget
The operating budget includes a personnel budget, which takes into account productive and nonproductive paid work hours. Education hours are covered under nonproductive paid work hours in the operating budget.

REF: Page 223 TOP: AONE competency: Business Skills

7. A staff nurse regularly works two 12-hour shifts each week and one 8-hour shift every other week. How many FTEs is this position?
a. 0.6
b. 0.7
c. 0.8
d. 1
Assuming that a full-time RN works 2080 hours/year (40 hours ´ 52 weeks), the nurse works (24 hours ´ 52 weeks + 8 hours ´ 26 weeks)/2080, which is 0.7 FTE.

REF: Page 223 TOP: AONE competency: Business Skills

8. After reviewing her monthly budget report, the nurse manager sees that she has a negative variance, which prompts her to change the staffing schedule. A negative or unfavorable variance in a monthly expense report may result from:
a. Overestimation of inflation.
b. Higher than expected client acuity.
c. Net revenue exceeding net expenses.
d. Not replacing staff who called in sick.
Variance reflects the difference between what was projected and the actual performance in a budget. When the variance is negative or unfavorable, the amount spent is more than what was budgeted (expenses exceed revenue); this may be a result of higher acuity. To help managers interpret and use variance information better, some institutions use flexible budgets that automatically account for census variances.

REF: Page 226 | Page 227 TOP: AONE competency: Business Skills

9. An example of an initiative that may reduce total healthcare costs would be:
a. Offering nurse practitioner–led clinics that educate parents about nonpharmacologic strategies for managing ear infections.
b. Educating seniors about the comparative costs of medications that are prescribed to them.
c. Lowering copayments for prescription drugs for seniors.
d. Advocating for more readily available MRI services to ensure early diagnosis.
Total healthcare costs are a function of prices that are established for various services and the volume or quantity of services used. Utilization of high-tech diagnostic services and lowering of copayments have been implicated in increasing total healthcare costs (thus C and D would not be correct), as well as attitudes and behaviors of consumers of health care. In general, consumers prefer to “be fixed” when something goes wrong rather than to practice prevention. Many consumers still believe that the physician knows best, so they do not seek much information related to costs and effectiveness of different healthcare options. When information is sought, it is not readily available or understandable. Also, consumers are not accustomed to using other, less costly healthcare providers, such as nurse practitioners.

REF: Page 213 TOP: AONE competency: Business Skills

10. Which of the following factors is not implicated in rising healthcare costs?
a. Rising expectations of consumers for cure and care
b. Marketing of drugs to consumers
c. Large administrative staffs to process medical billings
d. Rising Medicare costs
Unintentional injuries, socioeconomic conditions (e.g., poverty and violence), marketing of pharmaceuticals, and the rising expectations of consumers with regard to what should be done to manage health concerns all contribute to rising healthcare costs. The costs of Medicare are not considered in relation to rising costs of health care.

REF: Pages 212-214
TOP: AONE competency: Knowledge of the Health Care Environment

11. An older adult couple with limited means and on Medicare is considering options after the hospitalization of Mrs. A. with a fractured hip. Mrs. A. is stable but requires assistance with bathing, transfer, and mobility, and this will present stress for Mr. A., who was hospitalized with a mild myocardial infarction last year. Considering their means and health concerns, which of the following might be the best option?
a. Hospice care
b. Custodial nursing home care
c. Home care
d. Hospital care
Of the options presented, C is the best alternative . Custodial nursing care is not covered under Medicare and therefore, the financial burden of this option may cause further stress for the couple. Medicare Part A is an insurance plan for hospital, hospice, home health, and skilled nursing care that is paid for through Social Security. Because Mrs. A. is stable and not terminal, she does not require hospice care. The assistance provided through home care is covered under Medicare and provides assistance for needs such as those of Mrs. A.

REF: Page 214 TOP: AONE competency: Knowledge of the Health Care Environment

12. After a major flu vaccination campaign, an agency bills a private insurance company for allowable costs for administration of each vaccination according to the schedule established by the insurance company for reimbursement. This is an example of which major payment method?
a. Cost-based reimbursement
b. Charges
c. Contractual allowance
d. Prospective reimbursement
Because the agency is submitting costs after the campaign is completed and in accordance with an established schedule of allowable costs, a retrospective, cost-based reimbursement payment method is being utilized. If a desire for profit was indicated, then the answer would be “charges.”

REF: Page 214 | Page 215 TOP: AONE competency: Business Skills

13. Physicians in a small urban hospital are reluctant to discharge older adult patients because many of the patients lack private insurance and the resources to travel distances for follow-up care. The hospital administration pressures the physicians to discharge patients sooner and to be more consistent with the number of hospitalization days specified within the DRGs. Which of the following would most likely prompt the action of administrators?
a. The hospital is incurring a deficit related to a gap between the PPS and the DRGs and costs of care.
b. Local home care services are expressing concern about the increased acuity of patients being discharged into their care.
c. The resource-based relative scale for physicians does not account for the increased length of stay.
d. Acute care patients are being denied entry to the hospital because of the increased stay of patients.
Length of stay (LOS) is the most important predictor of healthcare costs and extra days are a cost to the organization in terms of both the extra days and decreased patient volume. The situation, as outlined, does not indicate that there is a bed shortage and therefore, there is no evidence that other patients are being denied access to services or that additional patient volume is not being captured. The hospital would be concerned about the impact on its income because of the additional, uncompensated care costs incurred for patients who exceed the usual length of stay explicitly calculated under PPS and the DRGs.

REF: Page 215 | Page 219 TOP: AONE competency: Business Skills

14. Within a healthcare environment, where the gap between revenues and costs can mean the difference between sustainability of an organization and nonsustainability of an organization or services, it is critical for nurse managers to:
a. Maintain a clear vision of how to trim healthcare costs.
b. Balance value-added services against costs and revenues.
c. Consistently delete programs that are of high cost.
d. Implement programs that bring in additional revenues.
To achieve and maintain financial viability, nurse managers must be able to think strategically financially and in terms of nursing care. Cutting costs by deleting programs and bringing in additional revenue through new programs and services are not in themselves strategic unless the decisions made lead to quality care, have positive outcomes, and are efficient in terms of cost.

REF: Page 217 TOP: AONE competency: Business Skills

15. Because of the complexity of reimbursement systems and its implications for the services available to patients, the nurse has a key role in:
a. Advocacy for patients with regard to services required and services utilized.
b. Increasing the volume of services and decreasing the number of patients served.
c. Accomplishing more with each visit and decreasing the volume of services used.
d. Decreasing the volume of services used and the number of return visits.
The specific strategies employed by organizations and nurses to contain costs and increase revenues depend on the reimbursement system(s) within which the organization operates and therefore on whether the volume of services is increased or whether the volume of services is decreased by placing greater emphasis on efficacy in each visit and reducing the number of return visits. Because of the complexity of the reimbursement environment, the nurse is placed in a position of advocacy in terms of what the patient needs and how those needs can be best met within the funding structures.

REF: Page 218 TOP: AONE competency: Knowledge of the Health Care Environment

16. Of the following, which is the most effective strategy that a nurse manager could employ to reduce unnecessary costs in specific healthcare settings?
a. Training nurses on accurate documentation of supplies used for patient care
b. Reducing the number of overtime hours worked by staff
c. Reducing the number of staff on a unit
d. Making decisions for patients about which care is important to their health
Reducing overtime hours needs to be carefully assessed against the reasons for overtime (e.g., staff overload, recent illnesses, increased acuity) in terms of whether this reflects an ongoing or temporary situation and therefore whether it is a necessary variance or not. Reducing staff may or may not be effective, depending on the services being provided. Making decisions for the patient misses an important opportunity to invite the patient into discussion about patient priorities and needs and relative costs of options, which may lead to improved adherence with regimens and less waste of resources. An effective approach to cost containment is ensuring that supplies are accurately accounted for and charged in a timely manner.

REF: Page 219 TOP: AONE competency: Business Skills

17. In preparing her budget, a nurse manager determines that she needs to budget for six FTE RN positions in the upcoming year. Based on a 40-hour week, this means that the nurse manager has determined that the budget will provide for _____ hours.
a. 12,480 productive
b. 10,820 productive
c. 12,480 paid
d. 10,800 patient care
From the information given, it is not possible to determine how many nonproductive hours (vacation, holiday, sick time, education) the nurse manager has accounted for in her budget calculations and therefore whether the total number of hours (40 hours ´ 52 weeks ´ 6 staff = 12,480 paid hours) is productive (paid time that is worked) or nonproductive hours. 12,480 accurately reflects the total number of hours of work paid per year.

REF: Page 223 TOP: AONE competency: Business Skills

18. In preparing her budget, a nurse manager determines that she needs to budget for six FTE RN positions in the upcoming year. The nurse manager determines that RN 1 has 5 weeks of vacation and 3 days of education, and has averaged 3 sick days a year. RN 2 has 6 weeks of vacation, has asked to attend a 3-day conference and a 2-day workshop, and has no history of sick time. RN 3 is new, and you anticipate 3 weeks of orientation, as well as 4 weeks of vacation. RN 4 has 6 weeks of vacation and has an ongoing health condition, so you anticipate 2 weeks of sick time, as well as 3 days for education. RN 5 has 5 weeks of vacation, has no education planned, and averages 5 sick days per year. RN 6 has 6 weeks of vacation, has no educational opportunities planned, and has been off ill for 4 weeks. How many hours of productive paid time can be anticipated for the budget?
a. 12,480
b. 11,200
c. 10,848
d. 10,688
From the information given, there are 32 weeks of vacation (40 hours ´ 32 weeks = 1280 hours), 11 days of education (11 days ´ 8 hours = 88 hours), 15 days of orientation (15 days ´ 8 hours = 120 hours), and 18 days of sick time anticipated (18 days ´ 8 hours = 144) or 1280 + 88 + 120 + 144 = 1632 hours of nonproductive time. This will leave 10,848 hours of productive time available, based on the information available and the fact that the manager is not anticipating sick time for RN 6 in the upcoming budget year.

REF: Page 223 TOP: AONE competency: Business Skills

19. The primary reason for calculating productive hours paid instead of simply calculating work paid per year is that productive hours enable the manager to:
a. Anticipate total costs for patient care.
b. Know how much time staff will likely be unavailable because of illness.
c. Determine when orientation needs to occur for new staff.
d. Determine the number of hours available for patient care.
Total hours are critical for determining the total number of hours that need to be paid for the year. Productive hours are needed to determine what hours are actually available for patient care. The number of FTEs required is determined by dividing the total patient care hours required by the number of productive hours.

REF: Page 223 TOP: AONE competency: Business Skills

20. In preparing a budget, the nurse manager needs to anticipate the cost of benefits (e.g., health, life insurance, pension and retirement plans). Based on the usual cost of benefits, how much should a nurse manager include for a total full-time salary cost of $312,000?
a. $78,000-$93,600
b. $62,400-$78,000
c. $46,800-$93,600
d. $31,200-$46,800
The average cost of benefits is approximately 25% to 30% of a full-time employee’s salary. In this example, the correct response is obtained by multiplying the total full-time salary cost by .25 and .30.

REF: Page 224 TOP: AONE competency: Business Skills

21. A nurse manager is planning to request three new infusion pumps at a cost of approximately $1500 each. This item would typically be included in which budget?
a. Operating
b. Strategic
c. Unit of service
d. Capital
Items that have a useful life of longer than a year, which is likely with the pumps, and that have a cost that usually exceeds $300 to $1000 (specific amount is set by the organization) are considered capital items. Operating budget items include what is used on a day-to-day basis, such as staffing.

REF: Page 225 TOP: AONE competency: Business Skills

22. A nurse manager is planning to request three new infusion pumps at a cost of approximately $1500 each. What would BEST support the capital request?
a. Number of patient care hours anticipated for the year
b. Cost comparisons; how much and how often infusion pumps are used; condition of existing pumps
c. Outline of cost for each pump
d. Estimation of total cost; no further details
Complete well-documented justifications are needed because the competition for limited resources is stiff. Justifications should be developed using the principle of any business case and should include, at minimum, projected amount of use; services duplicated or replaced; safety considerations; need for space, personnel, or building renovation; effect on operational revenues and expenses; and contribution to the strategic plan.

REF: Page 225 TOP: AONE competency: Business Skills

23. As an experienced nurse manager who is new to an organization, it would be important to:
a. Know the difference between operating and capital budgets.
b. Understand the budget timetable and level of involvement expected of individual managers in budget preparation.
c. Know why a budget is essential to the well-being of an organization.
d. Understand what factors drive up healthcare costs in the healthcare system.
Although all of the answers reflect knowledge that is critical to budgeting for nurse managers, an experienced nurse manager would likely be already familiar with general knowledge related to budgeting. The nurse manager, however, would need to become familiar with budget timetables and level of involvement expected in this specific organization because these elements of budgeting vary from work environment to work environment.

REF: Page 225 | Page 226 TOP: AONE competency: Business Skills

24. A nurse manager discovers that the actual number of visits per patient in a home health service is 3.8 visits per day when the standard is 5 visits per day. Based on this information, the nurse manager:
a. Concludes that the complexity of care in each visit has arisen.
b. Concludes that patient volume has been decreased.
c. Decides that more information is needed before a conclusion can be reached.
d. Initiates a training session regarding the importance of ensuring that visits are made.
Variance from measures of productivity or ratio of outputs to inputs does not necessarily offer an explanation of whether or not care was delivered as needed. Before proceeding to any further conclusion, the nurse manager will need to investigate reasons for the decreased output.

REF: Page 227 TOP: AONE competency: Business Skills


1. Which of the following are considered variable costs? (Select all that apply.)
a. Salaries for the minimum number of staff
b. Utilities and rent
c. Managed care
d. Supplies
e. Medication and treatment supplies
The total fixed costs in a unit are those costs that do not change as the volume of patients changes. In other words, with either a high or a low patient census, expenses related to rent, utilities, loan payments, administrative salaries, and salaries of the minimum number of staff to keep a unit open must be paid. Variable costs are costs that vary in direct proportion to patient volume or acuity. Examples include nursing personnel, supplies, and medications.

REF: Page 220 | Page 221 TOP: AONE competency: Business Skills

2. During the budgeting process, nurse managers are typically responsible for which of the following? (Select all that apply.)
a. Determining inflationary rates for the upcoming year
b. Developing unit operation objectives
c. Justifying capital equipment requests
d. Predicting cash flow
e. Negotiating budget with other managers and administration
ANS: B, C, E
Although involvement in budget processes will vary from institution to institution, these are typical responsibilities for nurse managers during the budget process.

REF: Page 225 | Page 226 TOP: AONE competency: Business Skills